Tag Archives: equilibrium IAMs climate change models

Workshops on Global Markets

Two small workshops on global markets and sustainability

 

 

Objects of governance have turned into parts of a globally interconnected system whose sustainability is at risk. This calls for a « global systems science», which could on the one hand support governance and, on the other hand, explicit how power and influence are transmitted in these interconnected systems. The aim of this workshop is to investigate how those two issues materialize in the economic realm: new questions and challenges economic policy addresses to science and new questions and challenges science faces when investigating economic policy and decision making in a globalized market environment.

 

Middle-term issues, whose time-span approximately coincides with the average five years electoral mandate, might possibly be dealt with by neo-classical social science: policy-makers maximize their probability of being reelected by putting in place policies whose efficiency (number of jobs created or quantity of pollution avoided) can be assessed “all other things being equal” using computable general equilibrium models.  Questions about sustainability are of a different kind, they are not asked “ceteris paribus” as they rely on endogenous dynamics and challenge the very existence of the system under investigation.

 

Sustainability mainly refers to the long-term balance between economic development and environmental conservation but also materializes as problems with very short time-horizons such as the 2011 earthquake in Japan, the failure of Lehman brothers, or the sovereign debt crisis in the Eurozone. Both for short and long-term issues, decision-makers turn to science with very specific as well with very general questions, with micro and macro problems. As far as environmental change is concerned, questions range from “How to reproduce locally an industrial symbiosis like this of Kalundborg ?”  to “How to move to a competitive low carbon economy in 2050 ?” Turning to the financial realm, one might wonder whether (or until when) the global financial system was sustainable or if it can today provide the 30 billions euros Greece needs by 2020 to upgrade its energy system[1] ?

 

It is doubtful that a single model might address those issues.  Even if one embeds all existing heterodoxies, very few of the policy-relevant questions of the time can be answered. Among the challenges to be faced in order to overcome this failure are the disaggregation and the extension to non-equilibrium phenomena of economic models and the exploitation of the wealth of data at hands thanks to the IT revolution.

 

The burgeoning mind of economists has managed to develop a wide taxonomy of models (e.g general equilibrium, CAPM, Bertrand or Cournot competition, principal-agent) under the, most often ad-hoc, constraint of only considering equilibrium situations. There is little doubt that this taxonomy can be extended if the economist toolbox is enriched by non-equilibrium models inspired by harder sciences.  How to foster this process ? For example how can econophysics and agent-based models become mainstream within the economic profession ? Which standards can be established to better communicate about models that aren’t always analytically tractable ?

 

New classes of models and new tools are also required to exploit the wealth of data at hands thanks to the IT revolution. Statistical institutes produce a limited and rather immutable class of indicators with a certain lag. Now, most if not all the data collected by statistical institutes during census operations are in fact readily available in some electronic form and circulating at extremely high speed on the internet. What are ethical and methodological issues posed by “big data” ?  Are current models up to the challenge of parsing if not explaining  the material ?

 

 

Finally, as a counterpart to the questions posed by policy, shouldn’t global systems science come with series of interrogations about power and governance in the globalized economy ? With markets’ liberalization and globalization, nation states seem to have lost part of the influence and the power they had on the economy. Where has this power gone ? Can citizens be offered better maps of the corporate governance network, the financial system or the international trade network ?  Aren’t such maps necessary to embed in the democratic process the redrawing of boundaries between the public and the private spheres, the public and the private sectors, communities and cities, membership and governance ?

 

 

 

Two series of questions

 

 

Global Markets I : Thursday, 8th November 2012, 15.15 -16.45

 

– What is unique about our system of globally interconnected markets that  materializes itself in this massive flow of data ? i.e “Big data” is the symptom of what ?

– How can this data be used to better understand the system which generates it?

– How can models parse and/or explain this  “big data” ?

– What is specific to models of the global economic system ?

– For example, does increasing connectivity lead to increasing fragility, what transpires in models as volatile or even chaotic behavior ?

 

 

Global Markets II: Friday, 9th November 2012, 10.30 -12.30:

 

How can  models using « big data » be more useful than existing ones for policy purposes ?

– What kind of models can be used for « emergency » economic and financial  management ?  By who and how ?

-What kind of models can be used for long-term issues such as strategic planning  or scenario generation ?  By who and how ?

– What kind of models do we need to better manage the transition to a green economy ?

-How can models improve public understanding of the dynamics of global systems ?

What would  be the impact of on governance ?

On equilibrium and bad economics for the global system

Orthodox economists, including New Keynesians such as Paul Krugman, think that economies eventually converge to equilibrium. This thinking can lead to the idea of a “return to normal” after any recession or depression, when the depth and especially the length of the recession might instead lead to a lowering of expectation by investors and a consequent lowering of the long-term growth rate.
It is very helpful to abandon equilibrium as an organising concept in understanding the processing at work during recessions and in forming expectations about climate change mitigation and carbon prices. It is helpful to realise that the interacting economies in the world system are not in equilibrium (or disequilibrium for that matter) but in a chaotic but remarkably orders dance with some outcomes more stable through time than others. Abandoning equilibrium also downgrades the search for the global social optimum in modelling. We can expose the absurd assumptions of the benign global dictator required to solve integrated assessment models (IAMs) of climate change economics such as William Nordhaus’s DICE family of models.

 

Terry Barker

4CMR, University of Cambridge